With Income Tax Amendment Bill passed in Lok Sabha on November 29, 2016, the Narendra Modi government tightened its grip on those who hoarded black money and refused to disclose the same even after the demonetization of INR 500 and INR 1,000 currency notes.

With the new “Income Tax Amendment Bill” along with “Pradhan Mantri Garib Kalyan Yojana” of 2016, the government now tries to achieve two important things:

Give an opportunity to black money holders to disclose their undisclosed income through Pradhan Mantri Garib Kalyan Yojana.

Close all loopholes in the existing Income Tax Act, which the black money holders could have possibly exploited to keep their black money.

This amendment bill which has been introduced and passed in the parliament puts some strict rules in place for those who have undisclosed income. Some of the changes made under this new amendment are:

Taxes charged will be higher.

Heavy penalties will be levied under the following sections:

115BBE

271AAC

271AAB

What will happen if someone declares unaccounted income under Garib Kalyan Yojana?

As we said, the Pradhan Mantri Garib Kalyan Yojana is a new income declaration scheme. This yojana allows holders of black money with an opportunity of getting rid of black money with less penalties. There will still be a massive deduction from the declared money. The deductions that will take place are as follows:

Deductions to be made from unaccounted income if declared under PMGKY

Percentage of money that will be deducted

Income tax deduction

30% of the unaccounted income.

Surcharge on the unaccounted income

33% of the total income tax paid.

Penalty to be paid

10% of the total tax that will be deducted (included the income tax of 30% and surcharge of 33% on the 30% of the income tax that is deducted).

With these calculation, the total tax that one needs to pay on the unaccounted money, if declared under the Pradhan Mantri Garib Kalyan Yojana, turns out to be 50%.

That’s not the end. After 50% tax, has been deducted from the unaccounted money, the person will be forced to pay 25% of the remaining money to the government for the purpose of investment in various deposit schemes. Once the money is invested, the following things will happen:

The interest earned on such investments will be kept by the government. This means that for the person concerned, the investment will become interest-free.

The money will stay invested for a period of 4 years. Under no circumstances can the person take the money back or even ask for it. This investment will be compulsory.

Why amendments have been introduced to Income Tax Act?

One may think that if tax incidence stands to 50% of unaccounted money in case it is declared under the Pradhan Mantri Garib Kalyan Yojana then, why was the amendment required in Income Tax Act.

The amendments to the Income Tax Act comes as a definitive bad news for black money owners. The reason why these amendments were made is that the existing law had a few loopholes and the new amendments look forward to seal those loopholes which, the black money owners could have possibly exploited.

So, what loophole are we talking about?

If the existing Income Tax Act was kept intact, then after the demonetization took place, the black money holders could have easily deposited their unaccounted money in the bank accounts and showed the same as their income in current fiscal year. In such a case, only the following things would happen:

For any income of INR 1 crore and above, there would be 30% tax.

There would be some surcharge for that income.

There would be a cess of 3% for that income.

Paying a small amount to the government, the black money owners could easily convert their black money into white money.

This explains why the amendment was necessary.

So, what will happen after this amendment?

The new amendment will affect the Section 115BBE under the Income Tax Act. The amendment thus introduced has been put into effect from an earlier date of 01.04.2016 (that is the beginning of the fiscal year 2016-2017). This amendment says that once the government DETECTS the black money, which can be anything like investment, assets, cash etc., the following things will happen:

60% of the total black money (which can be investments, assets or cash or anything else), will be charged as income tax.

25% surcharge will then be applicable on the tax which has been deducted.

This will mean that the total tax incidence will stand at 75% (approximately).

Over and above this 75% tax, the government will be levying another 10% tax. This 10% additional tax is basically a penalty that will be charged. This penalty that will be charged will be under section 271AAC of the Income Tax Act.

What if black money is caught during raid?

This is another situation in which the government (Income Tax Department) can conduct raids. Now, provisions for search and seizure raids are present in the Income Tax Act. The section which deals with this is 271AAB. So, the amendments were made to this section as well and the provisions for searching and seizing the unaccounted money have been made pretty strict.

As per the new amendment, in case the government finds or CATCHES black money during an Income Tax Raid, it will be considered as a person is deliberately holding black money and doesn’t want to declare the unaccounted money. In such a condition, if the person holding the black money agrees to the fact that he or she tried to evade taxes, 30% tax plus other charges will be applied. However, if the person denies of tax evasion during raid, section 271AAB will applied and the total tax that will be applied on the unaccounted income will be 60%. Remember that this charge (30% or 60%) will be in addition to the charges which will be levied under section 115BBE

Examples to help you understand the tax implications

Here in this section we will try to explain how the new amendments will impact the holders of black money and what kind of tax implications they need to face in case they declare their income under Pradhan Mantri Garib Kalyan Yojana and in case they are caught during a raid.

Let us assume that someone has black money of INR 5 lakhs. Then, the following scenarios come in:

So, the total money that will be left after deduction will be INR 500,000 – INR 386,250 = INR 113,750

So, the total deductions on black money stands to around 77.25% of the total unexplained cash or assets or investments.

In addition to that, if the owner of the black money does not declare that unexplained or unaccounted money voluntarily and that the assessing officer thinks that the money is unaccounted, additional 10% penalty will be levied (Section 271AAC). This 10% penalty will be on the actual income tax that will be deducted. This means,

Penalty = 10% of INR 300,000 = INR 30,000

Thus, the total money that will now be deducted will be INR 386,250 + INR 30,000 = INR 416,250. This now stands to 83.25% of the total black money.

C) Government CATCHES black money during a raid (271AAB)

As we said earlier, in a scenario like this, an additional charge of 30% or 60% will be charged in excess of what is being charged under section 115BBE.

Just to refresh, the charges which are applicable under 115BBE are:

Levy a tax of flat 60%

Levy a surcharge of 25% on the tax that will be deducted.

Levy a Cess of 3% over and above the tax and surcharge that is levied on the black money.

In our example, the total charge under 115BBE stands at INR 386,250. In addition to that the applicable charge under 271AAB will be:

Either 30% of total income provided that the person accepts during raid that he tried to evade taxes.

Or, 60% of total income provided that the person does not accept during the raid that he tried to evade taxes.

So, if the person accepts he or she will have to pay another INR 1.5 lakhs in addition to INR 386,250. If he or she doesn’t accept, he or she will have to pay another INR 3 lakhs in addition to INR 386,250.

The whole example in a single table

That’s pretty much all the explanation that is required to explain the proposed changes in taxation on black money. In case you are still unable to grasp the whole thing, the table below showing the numerical examples at a glance might help you.

Example: Black Money Amount: INR 500,000

Taxes and Penalties

Different scenarios

Scenario 1

Scenario 2

Scenario 3

Black money declared under Pradhan Mantri Garib Kalyan Yojana

Government authorities detect black money

Government authorities conduct an income tax raid for search and seize

Person accepts that he or she tried to evade taxes

Person does not accept that he or she tried to evade taxes

Applicable Section

N/A

115BBE + 271AAC

115BBE + 271AAB

(A) Tax on income

30% of 500,000 = 150,000

60% of 500,000 = 300,000

60% of 500,000 = 300,000

60% of 500,000 = 300,000

(B) Surcharge on tax

33% of 150,000 = 49,500

25% of 300,000 = 75,000

25% of 300,000 = 75,000

25% of 300,000 = 75,000

(C) Penalty on income

10% of 500,000 = 50,000

Not Applicable

Not Applicable

Not Applicable

(D) Cess on surcharge and tax

Not Applicable

3% of (A + B) = 11,250

3% of (A + B) = 11,250

3% of (A + B) = 11,250

(E) Penalty on tax paid* (This falls under section 271AAC)

Not Applicable

10% of A (300,000) = INR 30,000

Not Applicable

Not Applicable

(F) 30% penalty on income (This falls under section 271AAB)

Not Applicable

N/A

30% of A (500,000) = 150,000

Not Applicable

(G) 60% penalty on income (This falls under section 271AAB)

Not Applicable

Not Applicable

Not Applicable

60% of A (500,000) = 300,000

(D) Investment in interest-free schemes for 4 years

25% of 500,000 = 125,000

Not Applicable

Not Applicable

Not Applicable

Total (Tax + Penalties) payable

A + B + C = 249,500

A + B + D + E = 416,250

A + B + D + F = 536,250

A + B + D + G = 686,250

(E)* Please note that E is applicable in case of scenario 2 if the black money holder does not willingly declare his or her unaccounted money and the assessment officer determines the income to be unaccounted income.

Hopefully, the table above you help you understand the tax implications in case of black money. So, if you have black money, it is better you get rid of you quickly by declaring the unaccounted income as soon as possible. If you fail, the consequences can be severe. Why take risk of putting your reputation at stake?